JPMorgan Chase & Co.(NYSE:JPM) has sounded the first warning of what investors should expect in the first quarter as revenues in the investment banking unit continue to drop. Uncertainty in the stock market compounded by plummeting oil prices has all but continued to affect the banks prospects in the industry.
Rough First Quarter
During their annual investor day, the bank said it expected a $500 million increase in losses attributed to energy loans. The sentiment should all but continue to signal a rough first quarter for the US largest bank. Head of investment banking, Daniel Petno, has already raised concern over a drop in the number of investors willing to take risks.
Investment banking fee revenues are already down by 25% this quarter. Trading revenues are also down by 20% further highlighting the impact of uncertainty that continues to grip the industry. JPMorgan prospects have also been hurt by the current low-interest rate environment. Hopes for a higher interest rate continue to fade, further dealing the bank’s ability to make profits on loans a big blow.
The risks of bank loans not being repaid continues to soar. A good number of companies in the energy sector are slowly slipping into bankruptcy meaning most of them won’t be able to pay their loans. Thousands of jobs have already been cut in the sector as oil prices show no signs of rebounding from the current lows.
Defense Mechanism
JPMorgan move to raise its energy loan reserve by 60% further highlights how things are thick in the banking sector. The bank says it would set aside $1.5 billion in reserves should oil prices drop to $25 a barrel and stay there for 18 months. Oil and gas portfolio accounted for $42 billion of the bank’s total assets as of September.
JPMorgan is not the only bank to stock defenses, as uncertainty continues to grip the energy sector. Wells Fargo & Co (NYSE:WFC) has already increased its provision for sour assets by 70%, mostly covering oil and gas portfolio.
Even with the rising provisions and high levels of market volatility, JPMorgan is not considering ramping up cost cutting efforts.
Anthony Young
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